Why in the News?
The Asian Development Bank recently issued a cautionary note for India’s susceptibility to imported inflation due to potential rupee depreciation amidst escalating interest rates in the West.
What is Imported Inflation?
- Imported inflation refers to the increase in the prices of goods and services within a country caused by a rise in the cost or price of imports.
- This phenomenon occurs when factors such as a depreciating currency, higher import costs, or increased international prices lead to elevated expenses for imported goods and services.
- Consequently, producers may adjust their prices upward to offset these higher costs, resulting in inflationary pressures within the domestic economy.
- This idea connects with the theory of cost-push inflation, which means that when input costs go up, it can cause prices for final products to go up too.
Reason behind the imported inflation:
- Capital Flows: Increased interest rates in Western economies attract foreign investors seeking higher returns, leading to capital outflows from countries like India and potentially depreciating the Indian rupee.
- When a currency depreciates, local consumers require more of their domestic currency to procure foreign goods, consequently elevating import prices.
- Borrowing Costs: Indian businesses and the government may face higher borrowing costs for infrastructure projects and investments if they raise funds in foreign currency-denominated international markets.
- Inflationary Pressures: Capital outflows can pressure the Indian rupee, causing imported inflation as the cost of imported goods rises due to currency depreciation.
- Trade Competitiveness: Exchange rate fluctuations from Western interest rate changes affect India’s trade competitiveness, impacting exports, imports, and domestic consumption.
Back2Basics: Asian Development Bank (ADB)
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Information |
| Establishment |
Established in 1966 as a result of the Conference on Asian Economic Cooperation held by the United Nations Economic Commission for Asia and the Far East. |
| Headquarters |
Manila, Philippines |
| Official Status |
Official United Nations Observer |
| Objectives |
- Reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration.
- Providing Loans, technical assistance, and Grants.
- Offering “hard” loans on commercial terms primarily to middle income countries and “soft” loans with lower interest rates to poorer countries.
- Providing direct financial assistance to private sector companies for projects with clear social benefits.
- Maximizing development impact through policy dialogues, advisory services, and co-financing operations.
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| Membership |
- 67 members, with 48 from the Asia and Pacific region.
- Admits members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and non-regional developed countries.
|
| Funding |
- Japan and United States hold the largest proportion of shares at 15.607%.
- China holds 6.444%, India holds 6.331%, and Australia holds 5.786%.
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| Sources |
- Bond issues on the world’s capital markets.
- Members’ contributions and retained earnings from lending operations.
- Repayment of loans.
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PYQ:
[2021] With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?
- Expansionary policies
- Fiscal stimulus
- Inflation-indexing wages
- Higher purchasing power
- Rising interest rates
Select the correct answer using the code given below.
(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5 |